Is Keshun Waterproof TechnolgiesLtd (SZSE:300737) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Keshun Waterproof Technolgies Co.,Ltd. (SZSE:300737) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Keshun Waterproof TechnolgiesLtd

What Is Keshun Waterproof TechnolgiesLtd's Net Debt?

As you can see below, at the end of June 2024, Keshun Waterproof TechnolgiesLtd had CN¥5.08b of debt, up from CN¥3.30b a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥3.33b, its net debt is less, at about CN¥1.74b.

How Healthy Is Keshun Waterproof TechnolgiesLtd's Balance Sheet?

The latest balance sheet data shows that Keshun Waterproof TechnolgiesLtd had liabilities of CN¥6.09b due within a year, and liabilities of CN¥2.95b falling due after that. Offsetting these obligations, it had cash of CN¥3.33b as well as receivables valued at CN¥5.83b due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Keshun Waterproof TechnolgiesLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥6.22b company is short on cash, but still worth keeping an eye on the balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Keshun Waterproof TechnolgiesLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Keshun Waterproof TechnolgiesLtd had a loss before interest and tax, and actually shrunk its revenue by 9.9%, to CN¥7.1b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Keshun Waterproof TechnolgiesLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥381m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Keshun Waterproof TechnolgiesLtd (1 is significant!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.